From Herald, 26/9/13
Reaction to Ed Miliband's plan to freeze energy prices has been, well, electric. Energy UK warned of “black-outs”; Centrica said it might go out of business; press commentators accused “Red” Ed of taking Britain back to the bad old 1970s of price controls, shortages and nationalisation. I suspect most consumers, this one included, said: about time.
Price control is a pretty blunt instrument, but governments sometimes have to use blunt instruments to make industries behave. The energy monopolies have been racking up prices and profits in lock step for years, making a nonsense of any free market in energy. This has been noted by both the consumer rights group, Which, and the Commons Energy Committee.
Other European countries regulate prices including France, whose state-owned EDF charges lower prices to its domestic consumers than to consumers in Britain. This is why Miliband is so confident that his proposal is not going to break EU competition laws. The howls of anguish from business groups are unjustified. In 1997 Gordon Brown imposed a £5bn windfall tax on the privatised utilities – mainly energy companies again – and no one thought he was abolishing capitalism. Miliband's price freeze will cost them £4.5 billion, according to Labour.
The only people who didn't respond to Miliband's price freeze were the Scottish Government, who seemed curiously reluctant to comment. When UK political parties propose populist measures, the SNP generally claims to have thought of them first and/or pledges to go further after independence. But no promises to freeze energy costs in an independent Scotland emerged yesterday. Yet this country is colder than the rest of the UK and there are more people in fuel poverty. A break from the relentless inflation, which has put £300 on an average bill since 2010, might be welcome. Could it be that the SNP are just a little feart of the Big Six – EDF, Scottish Power, SSE,Centica, Eon, AWE?
Ed Miliband cited the NHS in his conference speech on Tuesday as a good reason for voting No in next year's referendum – though his suggestion that Scots might not get heart treatment in England after independence was pure scaremongering. He might have been better to cite energy. Could a Scottish government implement a unilateral price freeze in an integrated UK energy market? Would it have the power or the will to break up the vertical energy monopoly? Possibly - but it would be a big ask. The danger is that a Scottish government – of any party - could be bought and sold by the energy companies just as it was bought and sold by the big banks before 2008.
Mind you, it is not entirely clear yet that a UK government has the will and the power to regulate the international energy market. A 20 month freeze on energy prices is hardly going to reform this delinquent industry. Moreover, Miliband has - since his speech - offered a get out clause promising that, if there is some "energy shock", like a foreign war or a revolution in Saudi Arabia that affects supply, then his freeze will be broken. Moreover, since Ed Miliband is proposing to freeze prices from 2015, this gives the energy companies plenty of scope to ramp up their prices before the next election in order to allow for a temporary freeze.
And who will get the blame for that? Well, David Cameron of course. Labour hope that Cameron will be left trying to defend the indefensible as the energy companies show just what they think of the free market by riding rough-shod all over it in the next 18 months. Indeed, cynics might argue that Miliband's entire policy is a purely presentational one - a classic manoeuvre, of the kind Gordon Brown loved designed to put the Tories and the Liberal Democrats into a corner.
It may well be that, by the time Labour comes to office, there is a consensus on replacing the toothless regulator, Ofgem. The energy companies, who are now offering what they call a “big grown up debate” about the energy market, may have moved sufficiently for Prime Minister Miliband (strange how odd that sounds) to say the freeze is no longer necessary and indeed could distort the market. After all, £110bn is said to be needed in the short term to upgrade the National Grid, build new power stations and promote renewables.
Certainly, price controls have a mixed record – a freeze on energy prices in California is said to have contributed to black outs after 2000 - though market-rigging by Enron helped. Prices do provide important information for firms to assess the demand for their products and, insensitively handled, price controls can choke off investment in infrastructure and product development. However, for the price mechanism to work, markets must be working freely, and at present in the energy industry and it is patently obvious that they aren't.
The energy companies have been raking in excess profits - £3.9bn a year according to Which – which result not from the operation of a free market, but from their own monopolistic practices. The appearance of price competition in the industry is largely illusory. Which attempted to shop around and revealed that many of the so-called “switch” deals actually increased prices rather than reduced them for the consumer.
The essential problem is that energy companies mostly generate the energy they market and can manipulate prices in all manner of ways depending on how they set the wholesale price. They also serve a captive market of consumers who have no choice but to use their products – unless you resort to wood-burning stoves and oil lamps. The Big Six are mostly foreign-owned multinational companies - and state controlled in the case of France's EDF. It is very difficult for new players to enter this business.
Ed Miliband is doing what any responsible government would do after being handed such evidence of price fixing: he has called a halt to it. Shot a warning across their bows; demonstrated that someone is actually prepared to do something about it. British voters know from their own bitter experience that these companies are not to be trusted. The UK regulator, Ofgem, has lost the confidence of the consumers and the government.
All capitalist markets have to be regulated at some stage or else – as Adam Smith himself observed – they will form cartels to rig the market against the consumer. Miliband isn't abolishing the market – he's trying to make it work. If that's socialism, then bring it on.